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Growth with guardrails, anchored in discipline! Fundamentals improving but valuations pricing in the upside

* Tata Capital (TCL) is among India’s leading diversified NBFCs, with an AUM of INR2.77t as of Mar’26. The company has delivered a robust ~29% AUM CAGR (excluding Motor Finance) over FY23-26, reflecting the strength of its franchise, diversified business model, and consistent execution.

* TCL’s loan portfolio is highly granular, with ~98% of accounts carrying ticket sizes below INR10m. Asset quality is supported by a predominantly secured lending book (~80% secured), while the portfolio is also well diversified, with no single product contributing more than 20% of total loans. We believe TCL is well-positioned to sustain a healthy AUM CAGR of ~23% over FY26-28E, along with a calibrated shift toward higher-yielding segments and continued investments in digital capabilities.

* TCL benefits from a strong liability franchise, supported by Tata Group parentage and a AAA credit rating. This enables access to funding at competitive costs. We expect margins to gradually improve as the portfolio mix shifts further toward retail and unsecured lending, with NIMs increasing to ~5.4%/5.5% in FY27E/FY28E from ~5.2% in FY26.

* The company has displayed disciplined cost control measures through digital initiatives, process improvements, and branch-level productivity. As new branches scale and technology matures, productivity gains are expected to enhance efficiency. We estimate cost-to-income of ~35%/~33% and opex-to-avg. assets of 2.1%/2.0% in FY27/FY28.

* TCL has consistently demonstrated prudent risk management through disciplined underwriting standards and proactive collection practices. While credit costs remained below 1% during FY23-FY24, they increased following the TMFL merger, driven by elevated delinquencies in the captive vehicle finance business and stress within certain unsecured lending portfolios.

* TCL is now steadily turning around its Motors Finance business, with thissegment returning to profitability in 4QFY26. Further, unsecured segments are also experiencing a sharp asset quality improvement, leading to moderation in credit costs. We expect credit costs to moderate further to ~1.1% in both FY27 and FY28.

* TCL represents a high-quality franchise with strong parentage, a granular and increasingly retail-oriented portfolio, and a demonstrated track record of execution. While we expect the company to deliver healthy AUM growth and gradual improvement in profitability over the medium term, we believe current valuations adequately reflect these positives.

* We initiate coverage on TCL with a Neutral rating and a TP of INR390, based on 2.7x Mar’28E P/BV. A meaningful re-rating would likely require sustained improvement in RoA and RoE and continued expansion in higher-yielding retail lending segments.

Margin expansion fueled by rising unsecured mix

* TCL’s margins have remained relatively stable in recent years, supported by a diversified product mix and risk-calibrated pricing. A growing share of higheryielding retail and SME loans has largely offset yield compression in corporate and housing finance portfolios.

* Its NIM moderated in FY26 due to slower growth in unsecured lending and the continued runoff of the motor finance portfolio. However, improving disbursement trends in unsecured segments and the turnaround of the motor finance business are expected to support margin recovery from FY27.

* On the liability side, TCL benefits from strong parentage and an AAA credit rating, enabling access to funding at among the lowest borrowing costs in the NBFC sector. While a softer rate environment may provide some support, the scope for a meaningful decline in funding costs remains limited amid elevated bond yields and geopolitical uncertainty.

* We expect portfolio yields to improve gradually (as the mix shifts toward higheryielding unsecured products) and offset the slight increase in borrowing costs. Consequently, we forecast NIMs to expand to ~5.4%/5.5% in FY27E/FY28E

Cost ratios to improve through productivity gains and AI-led efficiencies

* TCL has maintained disciplined control over operating expenses through a strong focus on productivity, process optimization, and digital transformation. Continued investments in technology and operational efficiency initiatives have helped support profitability while scaling the business.

* The company significantly expanded its branch network from 539 branches in FY23 to 1,477 branches in FY26, which, along with the integration of TMFL, led to a temporary increase in operating expense ratios.

* Going forward, the realization of merger synergies, improved productivity of newly added branches, and increased adoption of technology, AI, and digital tools are expected to drive operating leverage and enhance employee productivity. Accordingly, we expect the cost-to-income ratio to improve to ~35%/33% and opex-to-average assets to decline to 2.1%/2.0% in FY27E/FY28E.

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